Constitution 20 Private Law I

The CESL Proposal: an overview Hugh Beale

Nature of the CESL

• Optional Instrument • Forming part of each Member State’s law • Parties may choose to use • Will govern in place of domestic rules – Issues within scope • Does not replace domestic contract law

Background

• EU Commission’s

Communication on European Contract Law

(2001) – Differences hinder trade between MS • Intuition – Larger firms less affected • Subsidiaries • More sophisticated • Larger or more transactions • Less risk averse – Barriers psychological if not real

Action Plan on A More Coherent European

Contract Law (2003)

• Improve the

acquis

using a Common Frame of Reference • Reflect on an optional instrument

The Way Forward (2004)

• CFR – Fundamental [Guiding] Principles – Definitions – Model rules – (Essential background information) • To be used in revising and further harmonising – by altering domestic law • [basis of possible Optional Instrument]

Aim of consumer Directives

• Before +/- 2003 – Internal market • Minimum rights • “Confident consumers” – Consumer protection in own right • After 2003 – Encouraging cross-border sales – Removal of barriers to businesses • Later: B2B as well as B2C

B2C: The “Rome I problem”

• Parties may choose applicable law • Seller may use own terms • Rome I art 6 – Consumer entitled to mandatory rules of Law of state of habitual residence • If directed at that state – Business selling across borders • Must know laws of each country targeted – Internet shops: 28 laws?

The Way Forward (2004)

• Review of 8 consumer directives – Green Paper (2007) • From minimum to full harmonisation

Consumer Rights Directive

• 4 Directives • Doorstep and Distance Selling • Unfair terms and Sales – Little additional consumer protection – Full harmonisation • Failure – Major interference with domestic laws – Or narrow in scope • Final version – Distance and off-premises contracts only

CESL: new approach

• Optional Instrument – Forming 2nd part of each MS law – Does not replace domestic contract law – Cf CISG but “opt-in” • Own mandatory rules – Displacing “domestic” mandatory rules – High level of consumer protection – Must adopt as whole: Reg art 8(3) • Rome I art 6 does not cause problems – CESL part of law of C’s habitual residence

Scope: Types of contract

• Art 5 • Sales, digital downloads – + related services (installation, maintainance) • Not “mixed-purpose” contracts (Art 6(1)) • Nor consumer credit contracts (Art 6(2))

Scope: Cross-border contracts

• B2C (Art 4(3)) • either the address indicated by the consumer, the delivery address for goods or the billing address are located in a country other than the country of the trader's habitual residence; and • at least one of these countries is a Member State • B2B (Art 4(2)) • if the parties have their habitual residence in different countries of which at least one is a Member State

Scope: topics

• Issues within scope: Recital 27: not e.g.

– legal personality – the invalidity of a contract arising from lack of capacity, illegality or immorality – the determination of the language of the contract, matters of non-discrimination – Representation – plurality of debtors and creditors – change of parties including assignment, etc • Left to “pre-existing rules” of otherwise applicable law

Advantages for traders

• Advantages in both B2C and B2B – “Neutral” set of rules, applied uniformly – Available in many languages • B2C – Avoids multiplicity of mandatory rules – Trade off: • high level of consumer protection, higher than in some MS • but single system – MS may allow in domestic sales (Art 13(a))

Advantages for consumers

• High level of consumer protection – Beyond minimum EU requirements – Greater than in many laws • Consumer resident in MS with lower CP – Will get greater protection • Consumer resident in MS with higher CP – slightly lower protection, better choice and prices

Safeguards for consumer

• Explicit statement, separate from main agreement, consenting to use the CESL – Not just a standard term – “Blue Button” – Confirmation on durable medium • Standard information notice – ELI: better to have link to website where differences explained • High level of consumer protection

High consumer protection

• Pre-contractual information – CRD: “integral part of contract” – CESL: damages for breach of duty • Unfair terms – Black list: always unfair – Grey list where presumption that unfair • Remedies – S has no right to cure before C seeks termination/ price reduction (no “hierarchy”) – No time limit on termination

Advantages for B2B: SMEs

• Larger firms less affected – More sophisticated – Large transactions little affected • Cost of advice proportionally lower – Less risk averse • Some SMEs do sell c/b – Suspect many SMEs put off c/b business – SMEs in particular may be encouraged by • Neutral” set of rules, applied uniformly • Available in many languages

B2B: substance of rules

• Differences between laws not only issue • Lack of sophistication/ advice – May not read/understand other party’s terms – May not ask right questions – May not anticipate other’s opportunistic behaviour • SMEs need protection via mandatory rules

Differing laws

• Estonian Contract Law – Provides protection, “communitarian” • English law – Individualistic • Limited control over unfair terms – None in international contracts • Limited doctrine of mistake, no duty to disclose • No general doctrine of good faith • Parties left to specify what other must do

Is CISG suitable for SMEs?

• CISG incomplete – Limitation – Validity – Unfair terms – Good faith only for interpretation of CISG • Fall back on national law – Uncertainty – Lack of protection • Especially in international contracts

Which law for SMEs?

• SME’s – Assume risk averse – Would welcome protection • Duty of disclosure – Mistake, fraud by silence, duty to inform… • Unfair terms • Good faith and fair dealing

CESL: Unfair Terms art 86

(1) In a contract between traders, a contract term is unfair for the purposes of this Section only if: (a) it forms part of not individually negotiated terms within the meaning of Article 7; and (b) it is of such a nature that its use grossly deviates from good commercial practice, contrary to good faith and fair dealing.

CESL: mistake art 48

(1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: the party, but for the mistake, would not have concluded the contract or would have done so only on fundamentally different contract terms and the other party knew or could be expected to have known this; and the other party: (i) caused the mistake; … (iii) knew or could be expected to have known of the mistake and caused the contract to be concluded in mistake by not pointing out the relevant information, provided that good faith and fair dealing would have required a party aware of the mistake to point it out; or (iv) made the same mistake.

Duty of disclosure: art 23

(1) Before the conclusion of a contract for the sale of goods, supply of digital content or provision of related services by a trader to another trader, the supplier has a duty to disclose by any appropriate means to the other trader any information concerning the main characteristics of the goods, digital content or related services to be supplied which the supplier has or can be expected to have and which it would be contrary to good faith and fair dealing not to disclose to the other party.

CESL: Good faith art 2

(1) Each party has a duty to act in accordance with good faith and fair dealing.

(2) Breach of this duty may preclude the party in breach from exercising or relying on a right, remedy or defence which that party would otherwise have, or may make the party liable for any loss thereby caused to the other party.

(3) The parties may not exclude the application of this Article or derogate from or vary its effects.

Subsidiary role: recital 31

The principle of good faith and fair dealing should provide guidance on the way parties have to cooperate. As some rules constitute specific manifestations of the general principle of good faith and fair dealing, they should take precedent over the general principle. The general principle should therefore not be used as a tool to amend the specific rights and obligations of parties as set out in the specific rules…

SME dealing with LB

• Consumer-like protection – LB will face increased costs • Additional information • Uncertainty • Delay because more contested – May charge more/pay less – Will SME be prepared to pay premium?

– Suspect many risk averse – If don’t want protection, need not choose CESL

SME dealing with another SME

• May be on either side of the fence – Own terms may be challenged – May fail to give information – Own behaviour can be challenged • Think will still prefer protection – Can control own behaviour • E.g. make terms transparent – May use CESL as signal of honesty

Advantages of CESL for B2B

• Better for SMEs than CISG, English law • “Estonian law in English” • Lower costs of cross-border transactions – Single system in multiple languages • MSs should exercise option to allow – When neither is SME – use in domestic transactions

A major concern

• SMEs can learn to ask for CESL • Should mean they have protection – Protective provisions mainly mandatory • Risk if other party can “cherry pick” • Partial adoption permitted?

– Art 8(3) allows CESL without protective rules – Provisions making mandatory rules are in each chapter • Should be all or nothing, as for B2C

Risks

• Uncertainty until case law – Database • Delay and cost of ECJ applications • Interface with domestic law – What is in scope? • Penalty clauses? Negotiated terms? Unfair Commercial Practices?

– Risk of “public policy” arguments (Rome I art 9)

Disincentives to SMEs selling cross-border

• Not the only problem – Local delivery issues [?] – Local payment systems [?] – Language problems • Sales information • Complaints and warranty claims – Doubt about demand • C faces same problems in reverse • But CESL may help